7/10/2007 @ 3:00PM

Payola Disclosure

Talk about an incentive.
Nationwide Financial Services
has begun disclosing on its Web site that it is paying the National Association of Counties (NACo) a whopping $7.3 million this year to push its retirement products to local government employees.

Secretive endorsement fees and other under-the-table payments have been a growing source of controversy in the retirement products industry, including the $140 billion (assets) market for 457 plans, the public sector equivalent of the 401(k). The 457 plan market is dominated by annuity products, which themselves have been roundly criticized as excessively complex and costly.

Nationwide, through its Nationwide Retirement Solutions unit, pays the $7.3 million fee to the government association to exclusively endorse its annuity-based 457 plan. Nationwide’s assets under management through its NACo arrangement currently stand at a record $8.4 billion gathered from 350,000 public employees, mostly in suburban counties, according to their association.

Nationwide’s recent disclosure follows the filing last November of a class action against it by the Orange County, Fla., Sheriff’s Office. The sheriffs have charged the firm in U.S. District Court for the Southern District of Ohio with accepting illegal kickbacks from mutual fund firms whose funds it includes in its retirement products. Nationwide has filed a motion to dismiss the suit, which is pending.

Following up on a Forbes magazine story (Costly Lesson, Apr. 25, 2005), New York Attorney General Eliot Spitzer also fined
ING
$30 million and the New York State United Teachers $100,000 for failing to disclose an exclusive endorsement deal similar to Nationwide’s with NACo.

“The disclosure is part of an ongoing effort by NRS to become more transparent with all of its clients,” Nationwide said in a written reply to Forbes.com. “NACo selected NRS as its exclusive provider after conducting a due diligence process, because we offer a competitive product with excellent service and educational programs that support the needs of public sector employees.”

Such endorsement deals are the largest source of NACo’s revenues, contributing 37%, according to its latest annual report. Despite its heavy financial reliance on endorsement revenues, the association says an advisory committee of program participants has final say over the composition of such products. It also claims Nationwide’s fixed annuity has performed well, according to an independent consultant.

When Forbes.com asked NACo about the arrangement last November (A Billion-Dollar Retirement Rip-Off), Executive Director Larry Naake described the endorsement payments as a confidential “business arrangement” and declined to disclose them. He did not respond to a request to comment on the reason for NACo’s change of heart.